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Monday, February 15, 2010

Suggestion for Greece

The Greek Debt is approximately 300 Billion Euros

Were Greece to default, Stock Markets are likely to fall, the Euro is likely to fall, Gold is likely to rise.

So, why doesn't Greece, along with their friends at Goldman Sachs, construct a portfolio that will pay off in the event that Greece defaults?

If you know that Greece is going to default, is it possible to surreptitiously construct a position that will pay off 300 Billion Euro? How much would it cost, and how do you stop other European countries bailing Greece out, and screwing up the whole plan?

Let's take an example. How much would the SPX fall if Greece defaulted? Say the SPX declines 7% (1075 to 1000), a position of just 10% of the open interest in the SPX Feb 1100 Puts (12,000 contracts) would give a nice $90 Million Profit. Expand this to more expirations, more strikes, more instruments and this can soon add up to real money. For comparison: after the Russian crisis in 1998, SPX fell approximately 15%.